Court of Appeal reverses decision on holiday pay entitlements

The New Zealand Court of Appeal has handed down its decision on an issue that could have resulted in hundreds of millions of dollars in holiday backpay obligations for employers across the country. The appeal turned on whether an employer’s short-term incentive bonus payments were part of an employee’s gross earnings. Ultimately, however, the Court of Appeal overturned the previous decision, finding that the payments were discretionary and did not contribute to holiday pay.

The case concerned a glass manufacturer who implemented a short-term incentive bonus scheme for its employees in 2016 and 2017. The terms and conditions stipulated that "any payments made under the scheme are totally at the [company's] discretion... and there is no guarantee of any payment in any year."

Following this, the company believed that the payments made under the scheme were discretionary and therefore did not contribute to an employee’s holiday pay under the legislation. However, on behalf of the employees, the labour inspector asserted that the payments contributed to gross earnings, and therefore also affected holiday pay to the employee's advantage.

Employment Court Decision

At first instance, the Employment Court found that the scheme was “designed to incentivise employees and the payments were thus remuneration for effort”. It distinguished the scheme from what it described as “truly gratuitous payments”, such as Christmas bonuses.

Commenting that the company “could not avoid its responsibility as it was trying to do by labelling the scheme as discretionary,” the Employment Court held that the scheme did contribute to the workers’ gross earnings and holiday pay.

Court of Appeal Decision

On appeal, the company submitted that, given the scheme was not included in the formal employment agreement and that any payments under the scheme were “wholly discretionary”, it could not be characterised as part of gross earnings.

The Court of Appeal found that the Employment Court overlooked this fundamental definition of gross earnings.

“[The company] did more than just label its scheme discretionary. It included an express term that even if all the conditions were met, it retained the discretion not to make any payment,” the Court of Appeal said.

This led the Court to overturn the previous decision and find that the bonus scheme was discretionary and not included in holiday pay calculations.

Key Takeaways

• Employers should differentiate between payments that contribute to gross earnings and payments that are discretionary
• Discretionary payments are those by which an employer is not contractually bound to pay
• Discretionary payments are typically not included in the calculation of holiday pay
• Employers should take care to ensure company procedures comply with the Holiday Act 2003